TMI Blog2012 (4) TMI 120X X X X Extracts X X X X X X X X Extracts X X X X ..... profit making companies or companies which are not at all comparable considering their size, volume of turnover and other factors. In our opinion, the whole exercise of selecting the comparables by the TPO is not proper and is in a haphazard manner - Decided in favor of the assessee Regarding addition of Rs.1,13,84,034/- made by the AO on account of income received from the holding company treated as advance by the assessee deleted by CIT(A) - Held that: during the course of assessment proceedings the assessee has given a statement that it has received advance towards market research analysis services rendered during the year - Appeal is partly allowed by way of remand to AO - IT Appeal No. 2073 (Mum.) of 2010 - - - Dated:- 24-2-2012 - N. V. Vasudevan, R.K. Panda, JJ. Subachan Ram for the Appellant. Percy J. Pardiwala, Madhur Agrawal and Ms. Indra G. Anand for the Respondent. ORDER R. K. Panda, Accountant Member This appeal filed by the Revenue is directed against the order dated 17.12.2009 of the Ld. CIT(Appeals)-15, Mumbai relating to Assessment Year 2004-05. 2. The grounds of appeal no. 1 raised by the Revenue reads as under: "1. On the facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsulting Division (CP) and (b) Global Innovation Centre (GIC). It was submitted that CP division provides consulting services and GIC division provides low and back office support services to global offices of FS-Group through the parent company FS-USA. It was submitted that for the low and back office support services provided to FS-USA, the assessee charges FS-USA on cost plus 10% mark-up. It was submitted that for the services of GIC division, the FS-USA reimburses the assessee all the operating cost of the GIC division and also pays a profit margin of 10% on such cost. It was submitted that the business of the assessee does not involve development of software or software related consultancy services. 4.1 It was submitted that during the financial year 2003-04 corresponding to the Assessment Year 2004-05, GIC division of assessee provided low and back office support services to FS-USA and invoiced FS-USA a sum of Rs.7,15,02,852/- on the basis of cost plus 10% mark-up. Challenging the order of the TPO making upward adjustment of Rs.1,93,48,372/- it was submitted that the order was hectic and there is clear and blatant violation of principles of natural justice. It was submitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent and therefore earning substantially high margins. In any commercial transaction, the compensation paid to a party is a reflection of the functions performed by it, together with the assets employed and the risk assessment. The FAR analysis form the basis of characterizing the tested party and assets in adopting the right comparables for testing the arms length value of the international transactions. Thus, the whole process was inherently flawed since its inception. By merely applying quantitative filters he obtained a set of 102 companies without any further evaluation of the same on the FAR. It is very difficult to digest how TPO found large number of companies (102) from a very wide spectrum of ITES Software consultancy, business research and analytics. BPOs etc as comparable to the appellants back office support business. Such omnibus comparable list betrays a weakness in the screening process. By choosing companies at random he reduced the entire process as a whimsical one. 12.2 The TPO further compounded it folly by applying inconsistent standards to the search process. One quantitative filter it adopted was to reject those companies whose profit margins were more than ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ulated losses of US $6,586,413 as on 31-12-2004. In contrast the appellant has been compensated at cost plus 10% mark up though the AE has been suffering losses. The economics of the related party transaction has completely been ignored by the TPO. 12.5 Without prejudice to the above, it has also been pointed out that the TPO's instead of applying the margin of 20.42% on operating cost of GIC division which has international transactions, has in reality applied it to the entire cost of the appellant. While this is clearly a mistake apparent from record but it again demonstrates the Cavalier manner in which the whole exercise has been carried out. 12.6 The appellant has also taken an alternative plea that if advances received are considered as income as has been done by the AO then its margins would become 27.54%. The AO by adopting this stand has made the position of the TPO unsustainable. If advance is taken as income then the appellants margin become 27.54% which is more than 20.42% adopted by the TPO. However, since this ground has been agitated separately by the appellant, hence this fact is only mentioned in passing to highlight the overall contradiction in the stand taken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submissions given by the Ld. Counsel for the assessee the Ld. DR submitted that the Ld. CIT(A) has simply reproduced the submissions made by the assessee without proper application of mind. Referring to the copy of the order sheet entry, a copy of which is filed in the paper book, he submitted that opportunity has been given to the assessee, therefore, the Ld. CIT(A) was not justified in merely accepting the written submission of the assessee without application of mind. Since the order of the Ld. CIT(A) suffers from so many infirmities he submitted that the same should be set aside and the order of the AO should be restored. 8. The Ld. Counsel for the assessee, on the other hand, drew the attention of the Bench to Clause 8 of the TPO's order which reads as under:- "8. On this file information has been sought from US IRS. The information was sought about this assessee's AE's financials and ultimate selling price of business analysis reports in the US market. However, no such information has been received by this office till date. At the same time, it's moving towards the limitation date. Already an adjustment enhancing the ALP value of sale price of services to the AE has be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Results of comparables search at page no. 44. Referring to page no. 51 to 105 of the paper book he drew the attention of the Bench to Analysis of Comparable Companies made by the assessee and submitted that no fault has been found by the TPO about the analysis done by the assessee. Referring to the various companies taken as sample by the TPO, he submitted that as against the turnover of Rs.7 crores by the assessee, the TPO has considered companies as comparable whose turnover are more than Rs.100 crores and are giant companies. Relying on a couple of decisions, he submitted that there is no question of comparing giant companies as comparable with that of the assessee company which is a small one. He submitted that if at all any addition has to be made on account of adjustment of ALP, it has to be done only in relation with the transactions with AE's and not with entire transactions. For this proposition he relied on the decision reported in 37 SOT 227. He submitted that when the parent company is incurring losses world wide, therefore, there is no question of the assessee transferring the profit to the US companies. He accordingly, submitted that the order of the Ld. CIT(A) shoul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly after this incomplete list showing lesser profit than the profit declared by the assessee was brought to the notice of the TPO that he excluded the 47 loss making companies to determine the mean average profit at 20.42%. We, therefore, find merit in the submission of the Ld. Counsel for the assessee that there is no basis for only excluding the loss making companies and not excluding the high profit making companies or companies which are not at all comparable considering their size, volume of turnover and other factors. In our opinion, the whole exercise of selecting the comparables by the TPO is not proper and is in a haphazard manner. In this view of the matter and in view of the detailed discussion by the Ld. CIT(A) on this issue, we do not find any infirmity in his order and accordingly upheld the same. The ground raised by the Revenue is accordingly dismissed. 10. The grounds of appeal no. 2 by the Revenue reads as under: "2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs.1,13,84,034/- made by the AO on account of income received from the holding company treated as advance by the assessee without appr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue is in appeal before us. 14. The Ld. Counsel for the assessee referring to the copy of the Balance Sheet placed at paper book page no. 121 drew the attention of the Bench to Balance Sheet-Schedule F which shows current liability at Rs.1,61,63,495/-. Referring to the details of Schedule F, a copy of which is placed at page no. 125 of the paper book, he drew the attention of the Bench to Sundry Creditors and others, which includes advance received from Frost Sullivan Inc. against capital expenditure of Rs.1,13,84,034/-. He submitted that the assessee has to adjust the above advance from the bills to be raised. Therefore, this cannot be treated as income. Whatever bills have been raised by the assessee have been accounted for. Relying on a couple of decisions, he submitted that the Ld. CIT(A) was justified in deleting the addition. 15. The Ld. DR, on the other hand, supported the order of the AO. He submitted that the assessee has made contradictory statements before the AO according to which the amount received is towards advance for market research analysis services rendered during the year. In the balance sheet, the assessee has stated that the same is towards advance a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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